State aims at gas tax cheats

Station owners pocket millions in sales levies in widespread scam

Paul Merrion

Stephen J. Serio

The owner of this Morton Grove Shell station has been charged with 19 counts of sales tax fraud. The Illinois Department of Revenue has identified about 500 gas stations as "significantly underreporting" sales taxes on gasoline.

More than one in 10 Illinois gas stations are suspected of cheating the state by pocketing much of the sales taxes motorists pay at the pump, a statewide investigation has found, and the fraud could total in the tens of millions of dollars.

Criminal tax-fraud indictments of six gas station operators and owners in August were just the start of a much larger crackdown that so far has identified about 500 gas stations as “significantly underreporting” sales taxes on gasoline, an Illinois Department of Revenue spokeswoman says.

Even if they pay up, owners of those stations could face felony tax-fraud charges, and about a third of them already are under review for criminal prosecution, according to lawyers involved in some of those cases.

“I think they've realized they need to let the public know there's some teeth in the criminal side of the state revenue code,” says Royal “Rob” Martin, a partner at white-collar criminal defense law firm Martin Brown Sullivan Roadman & Hartnett Ltd. in Chicago who represents owners of two Illinois gas stations under investigation. “I think they've come to the conclusion they need to put the fear of God into these folks.”

Through October, Illinois collected $22 million in unpaid taxes from station owners who voluntarily complied with state audits, but the total amount of potential unpaid taxes has not been tallied, according to the IDOR spokeswoman. The state collects about $65 million to $72 million a month from its 6.25% sales tax on gasoline and other items sold by 4,700 gas stations in Illinois.

Ted Sinars, a partner at Chicago law firm Madden Jiganti Moore & Sinars LLP who represents about a dozen owners of almost 40 gas stations under investigation, figures that the state is seeking about $200,000 per gas station in 170 criminal cases, while another 330 civil cases hover around $100,000 each. The state could collect roughly $45 million more, on top of the $22 million already in hand.

The probe started in 2008 after complaints from competitors. “Nobody's an angel in this business, but if you're paying (taxes) and your competitor isn't, you want them to do something about that,” says Dave Sykuta, executive director of the Illinois Petroleum Council, a gasoline refiner trade group in Springfield.

Gasoline sales tax evasion is a long-running problem in Illinois, but what's different now is that the state is pushing for significant jail time in addition to restitution as part of any guilty plea negotiations, according to attorneys.

“That's a huge change,” says Robert A. McKenzie, an associate at Chicago law firm Arnstein & Lehr LLP who represents several gas station owners under investigation. “They really want to see people get the message.”

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The scope of the tax dodging was discovered after a 21-year veteran Illinois tax investigator devised a formula estimating how much sales tax should have been paid based on deliveries reported by fuel distributors, which led to a computerized cross-checking of monthly sales tax returns filed by gas stations.

It's one of several aggressive tax enforcement efforts the cash-strapped state has launched in the last year or so using data-mining techniques and new sources of taxpayer information (Crain's, Dec. 6).

Delinquent gas station owners face a 50% civil penalty for underreporting sales tax, and those facing criminal indictments could see two to five years in jail on each count of tax fraud if found guilty. In August's indictments, each station owner or operator was cited for 10 to 19 counts, one for each month they allegedly filed fraudulent reports.

A year ago, the state offered a one-month voluntary compliance program to gas station owners, and some also took advantage of the state's recent tax amnesty program. Of the $22 million in back taxes recovered so far, $9.3 million was collected after the August indictments.

Since 2003, Illinois has tried to address underpayment of gasoline sales taxes by collecting partial payment upfront; that's currently 6 cents per gallon for conventional fuel and 5 cents for gasohol, when fuel is delivered to gas stations.

The state's investigation found that some gas stations reported sales taxes that “were so low they didn't match up with the 6 cents a gallon they'd already paid,” the IDOR spokeswoman says.

In a bid to stamp out tax evasion, starting in January, gas stations will have to pay 100% of their estimated sales taxes upfront when they take delivery of fuel from distributors, currently 15 cents a gallon for gas and 12 cents for gasohol, more than twice what they had to pay in advance before.